• by Steve McClellan  @mp_mcclellan, June 1, 2012

A new study finds that incentive bonuses in the marketing services sector are lacking the size of pay-out and how they are planned.

About three-quarters of both traditional ad shops and digital agencies have basic bonus pools. But while 41% of traditional shops also have long-term incentive plans, just 5% of digital agencies have them. 

With proper implementation, Palazzo Investment Bankers stated long-term plans are the way to go because they help “manage cost and improve profitability.”

The Palazzo Investment Bankers study reports that bonus payments are not keeping up with the pace of revenue and profit growth of firms in sector, including traditional agencies, digital and interactive shops, PR agencies and other marketing services companies.

More than 85% of the 4,000 responding executives said their firms had revenue growth of 10% or more in 2011 versus 2010. And 61% of respondents reported better pre-tax profits.  

At the same time, bonus pools are shrinking. Between 2010 and 2012, there was a 6-percentage-point drop (22% to 16%) in the number of firms allocating 20% of more of their pre-tax profits to bonuses. At the same time, there was a 9-point increase (33% to 41%) among those allocating 10% or less of pre-tax profits for bonus pools.

Most firms lack a sensible process for issuing bonuses and tend to rely on arbitrary decisions by managers, the report concludes.  Over half (56%) of the respondents reported that size of bonus pools at their firms were determined by a “general assessment” by managers as opposed to a specific formula, while 44% said bonus pool size was formula-based.

Palazzo recommends that firms embrace formula-based bonus planning to better enhance the “value of linking personal performance with corporate goals.”

Senior executives get a disproportionate share of the bonus pool, per the report. Nearly half (46%) of respondents said the top three officers collect 25% or more of the bonus pools at their firms.

Within the sector, digital and interactive shops lag when it comes to providing long-term incentive plans.